Tag Archives: iPad

As expected Apple today announced the launch of the music industry’s worst kept secret iTunes Radio, a Pandora-like personalized radio service. iTunes Radio is integrated into the new iOS7, is free with ads to all, free without ads to Tunes Match subscribers. There’s enough different and new in iTunes Radio to make it stand out from the pack and to ensure it has a typically high quality Apple touch. But the prevailing narrative will be that Apple has taken the conservative me-too strategic option rather than bringing new transformative innovation to the marketplace. In many respects that analysis rings true but the complete picture is far more nuanced.

Apple is not in the business of creating markets or being a first mover. Apple is the archetypal early-follower. That applies even more to digital music than to hardware for Apple. The iTunes Music Store was far from the first download store, but it was, and arguably still is, the best. Apple is in the business of selling hardware and its music strategy is dictated by its ability to help it sell hardware. Rather than balance itself precariously on the bleeding edge of digital music innovation Apple waits for music technology to become ready for prime time.

Two Reasons Why Apple Has to Go Slow With the Cloud

All of that has rung true for a decade+ at Apple. But now there are new factors in the mix which play determining roles in Apple’s music strategy:

Apple has become a mainstream company: Apple’s nineties and noughties heritage was that of the early adopter tech aficionado. Now Apple is a mainstream consumer product company. Since the start of 2011 Apple has sold 468 million iPods and iPads. In doing so it has brought swathes of mass market consumers into the iTunes ecosystem, resulting in 575 million credit card linked iTunes accounts. But all this means that Apple now has to move more carefully, innovating at a pace that is appropriate for a majority of its customer base not just the highly engaged top end. Spotify’s 6 million paying subscribers is a fantastic achievement but pales compared to Apple’s iTunes user count. The simple fact is that Apple does not think that $9.99 subscriptions are yet ready for primetime for mainstream consumers.

The shift to the cloud will impact device pricing strategy: currently Apple’s device pricing strategy is dictated by storage capacity. The bigger the hard drive the higher the price. But once/if everything shifts to the cloud bigger memory capacities matter much less. This is why Apple has to go slow with the cloud. If it goes too quickly it could accelerate the transition at a rate it cannot manage and end up wreaking havoc in its core device business all for the sake of keeping digital music fans happy. A personalized radio service is a neat complement to downloads. It won’t win any awards for innovation but it will give mainstream Apple customers enough extra value without disrupting device sales, or indeed music sales. iTunes Radio buys Apple crucial time as it plans its cloud-era device and pricing strategy.

What Apple Could (and Should) Do

The shift to the cloud is of course inevitable and for all that iTunes Radio may buy Apple some time, the challenges must be faced. The answer to Apple’s problems may lie in the problem itself. If consumers increasingly shy away from higher memory devices – and therefore more expensive devices – content may prove to be the way in which Apple maintains premium price points across its device portfolio.

Content is the core reason people use iPads and iPods and one of the core reasons people use iPhones. A smart move would be to take that importance and bake it into the value proposition. Instead of charging a premium based on memory size alone, Apple could additional sell content-device bundles (and longer term phase out memory size pricing entirely). For example pricing tiers for iPads could look something like this:

Price point 1: 16GB, no content

Price point 2: 32GB $/€/£10 a month of iTunes content

Price point 3: 32GB $/€/£10 a month of iTunes content and on demand music streaming

The reputation of content-device bundles got somewhat tarnished by the Comes With Music experience, but the model remains fundamentally sound. Apple could just be the company to make it work. If it does, iTunes Radio will have proved to be a crucial first step on that journey.

In the meantime iTunes Radio is another important, incremental step in Apple’s cautious cloud music strategy. Cautious because Apple is intent on innovating at a pace that matches the appetite of its mainstream customers. Cautious because a hasty move could turn iTunes Music sales upside down with direct cannibalisation. And most importantly of all, cautious because Apple knows that if it gets it wrong it could disrupt device pricing strategy, with major repercussions right across Apple’s business.

In short there are many reasons for Apple to go slow with its cloud music strategy. That might not make for the most exciting of music product roadmaps, but it does mean that Apple is building for long term sustainability and viability. That in itself is of crucial importance for the music industry and should help ensure Apple remains a music industry partner of true scale for years to come.

On Sunday 28th April Apple’s iTunes Store will celebrate its 10th birthday. It is arguably the single most important milestone in the digital music market to date. In these days of cloud and streaming dominated industry discourse it easy to forget just how important Apple has been in the history of digital music and how equally important it remains today. In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around 55% of all digital trade income and close to a fifth of all global recorded music trade revenue. By comparison Spotify was closer to 10% of digital trade revenues and 4% of all global trade revenue. Spotify is clearly at a much earlier stage of growth and represents the future, but iTunes is far, far from being a historical footnote.

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

Baby Steps: On January 9th 2001 Apple launched its iTunes music management software, and later that year in November came the first ever iPod. Back then there was no iTunes Store and Apple made it very clear how they expected their customers to acquire digital music with their ad campaign slogan: ‘Rip Mix Burn’. Revolutionary as it was though, the iPod got off to a modest start: despite multiple product updates, by the end of 2002 Apple had still only shifted 600,000 iPods. iTunes wasn’t changing the world, not yet.

Changing the Tune: In April 2003 Apple launched the iTunes Music Store in the US, and then in 2004 in the UK, Germany, France and Canada, as well as an EU Store. There were plenty of download stores already of course – Apple is always an early follower not a first mover – but they were crippled by restrictive DRM, cumbersome technology and lack of interoperability. Most stores didn’t even allow buyers to transfer to MP3 players or burn to CD. And if you were lucky enough to be allowed to transfer to an MP3 player, your device probably didn’t even support the store’s DRM it probably also relied on incompatible 3rd party music management software. Apple changed all of that in an instant, delivering an end-to-end integrated experience. Steve Jobs, through a combination of sheer force of personality and a commitment to spend big on marketing (really big) managed to persuade the big labels to support unlimited iPods, CD burning and multiple PCs. Digital music hadn’t so much been stuck in the starting blocks as having its feet nailed to them. Jobs set digital music free. By July 2004 the iTunes Music Store had hit 100 million downloads, but more significantly by the end of 2005 Apple had sold 42.2 million iPods. iTunes was now selling iPods, and fast.

Beyond Music: When Apple was in the business of selling monochrome screen iPods, music was the killer app and iTunes was the marketing tool. But that changed on June 29 2007 with the launch of the iPhone. Apple soon needed more than music to market its multimedia, touch screen, accelerometer enabled devices. Movies were proving difficult to license and TV shows faced free competition from Hulu, iPlayer, ABC.com et al. The solution of course was the App Store. The App Store took just 3 months to hit 100 million downloads – it had taken the iTunes Music Store 15 months to hit the same milestone. Apple remained, and remains, firmly committed to music but its attention is inherently diluted by all of the other content types that iPhones and iPads cater for. When Apple launches a new device it is EA Games you see demonstrating a new game to showcase the device’s capabilities, not a new music track. (And of course the word ‘music’ got dropped from the iTunes Store name long ago.)

The Platform Challenge: The App Store turned the iTunes Store into a platform, albeit it a highly controlled one. This created an unprecedented window of opportunity for competing digital music services, suddenly they could break into the previously impenetrable iTunes ecosystem. Pandora was an early mover and within a year of launching its iPhone app had acquired 6 million iPhone users, 60% of its then 10 million active users. Shazam was another beneficiary, with the iPhone app finally giving Shazam relevancy and context it had long lacked. And now of course we have Spotify, Deezer, Rhapsody, Rdio et al all hugely dependent on the iPhone, using it as the central reason subscribers pay 9.99.

Responding to Streaming

Many commentators suggest Apple is being left behind in the streaming era. It echoes comments that Apple was getting left behind by the social age, and its responses then (Ping! and Genius) are not the most compelling of evidence for Apple jumping on the latest digital music bandwagon. Apple will of course have to eventually move towards a more consumption and access based model but it will wait, as it always does, until streaming and is ready for primetime. (A radio service is a logical interim step). Spotify’s 6 million paying subscribers are impressive but pale compared to Apple’s 450 million credit card linked iTunes account. And besides, iTunes is enjoying its most successful period ever (see figure). For all the need of interactive multimedia products to market iPhones and iPads, music remains one of the key use cases and the iTunes Store has seen an unprecedented surge in music downloads as millions of new music fans enter the iTunes ecosystem as iPad and iPhone buyers.

Interestingly Apple’s music download growth appears to be strongly outpacing the overall digital music market (see figure). According to the IFPI total global digital trade revenue grew by 8% in 2012 but Apple’s iTunes downloads grew by about 50% during the same period, culminating in 25 billion cumulative downloads in Q4 2012. Multiple factors are at play: iTunes has rolled out to new territories and a portion of the downloads will also be free. Nonetheless, iTunes remains the beating heart of digital music.

The Next Chapter

Apple’s next big digital music move will have major strategic ramifications that will go far beyond the iTunes Store. Currently Apple’s device pricing model is driven by storage capacity. And of course in a streaming age consumers will store less and less content on their devices, so the ability to charge a premium for extra storage capacity will diminish. This is a key reason why Apple has to go slow with the cloud. Music however also presents an opportunity to safeguard price premiums. Apple has shied away from subscriptions (Steve Jobs famously baited then-Rhapsody owner Rob Glaser that subscriptions were mere rentals) but device-bundled-subscriptions are now an opportunity that Apple simply has to take seriously. Instead of charging a monthly fee for subscriptions Apple could create ‘iTunes-Unlimited’ editions’ of iPads and iPhones that would include ‘device lifetime’ access to either unlimited music streams or a monthly allowance of iTunes credits (for use on all forms of iTunes content). The latter probably sits most comfortably with Apple as it presents the opportunity for tiers of access (e.g. $5 of monthly iTunes credit, $10 of monthly credit etc.) and so would enable Apple to support multiple product price tiers.

Whatever Apple decides to do with iTunes in the next 10 years, it will remain a key player and do not bet against it still being the preeminent force a decade from now.

Yesterday Apple announced that it had reached the milestone of 25 billion songs sold.* The number is impressive by any means and brings yet more important context to the current scale of streaming versus downloading. But of course music downloads are just one part of Apple’s business, and not a hugely important one at that. Apple sells downloads to improve its device proposition. As I have written before, it is effectively monetized CRM, and interestingly in these days of increased investor scrutiny, music sales are actually a low margin revenue stream for a company which prides itself on high margins. Which means the better that music sales do, the more they dent Apple’s profit margins.

But the really interesting trend that the 25 billion downloads reveals is that the surge in iPhone and iPad sales has brought a very significant boost to iTunes sales (see figure). This has major implications for the music industry. In 2008 digital music sales fell off a cliff when iPod sales started their long term decline (see my previous chart here). But now, following an inter-product cycle lull, music sales are up again. The impact of Apple’s device sales on music sales is huge. When declining iPod sales started pulling digital downloads growth down I wrote that ‘when Apple sneezes the music industry gets a cold’. Now it is also clear that when Apple smiles, the music industry grins from ear to ear.

There are other factors at play too (such as the impact of all those new Apple stores coming on stream in markets such as Russia and India). But the data does show that we are some way yet from streaming denting download sales. Largely because downloads are a much more natural entry point for new digital music consumers.

For some final context though, as significant as the surge in iPhone and iPad sales has been on music sales, it has had an even more marked impact on App downloads. Which is a timely reminder that these devices are built for multimedia, interactive, visual experiences. While the music industry’s main product for iPhones and iPads remains a static audio file. That problem needs fixing fast.

*For long term Apple watchers the use of the word ‘sold’ is significant. The language Apple usually uses is that in the opening paragraph of the release ‘bought and download’ which has long been assumed to be worded to capture free downloads also. The interesting question now is whether the use of the word ‘sold’ in the release headline is a clarification of terms, or an over eager copy editor.

The importance of Apple to the digital music market cannot be overstated. Without Apple the digital market would be vastly smaller than it is now. With all of the talk of streaming services and the shift to the consumption era it is easy to think of Apple’s iTunes Store as yesterday’s game. Such an assumption is as dangerous as looking upon the CD as an irrelevance in the present era. The CD and iTunes combined account for approximately 78% of total recorded music revenue in the world’s 10 largest music markets. And yet neither look like they are going to provide the momentum the music industry needs over the next few years. Despite its vast importance to music revenue today, the CD is obviously on a fixed downward path. And the download is not so dramatically different in profile in that it is the dominate revenue source yet is not delivering the dynamic growth the digital market needs. Key to this is of course the role of Apple.

Apple CEO Tim Cook told us at the launch of the iPhone 5 that ‘Apple still loves music’ and so it does. But music is inherently less central to Apple’s content and device strategy than it was 5 years ago. When the iPod launched it had a monochrome screen and did little else than play audio. Music was the killer app with which to market iPods. Now games, apps, video and books show off the capabilities of colour touch screen iPads and iPhones much better than a static audio file (even if music remains one of the key activities on both those devices). In the early days of the iPod Apple needed the record labels more than they did Apple. Indeed, to begin with the iPod was far from a runaway success. By the end of 2002, one year after launch, the iPod had only sold 625,000 units. The iTunes Music Store changed the story, delivering not only unprecedented digital music milestones, but also record iPod sales. After the first full year of the iTunes Music Store, sales of the iPod had quintupled from 2 million to 10 million, and one year later they surpassed 40 million. The iPod and the iTunes Music Store had a clear symbiotic relationship. Now though, Apple’s devices benefit from a much broader array of content and services from the iTunes Store, which pointedly is no longer called the iTunes MUSIC Store.

Apple’s diversification of device and content strategy heralded a brave new chapter in Apple’s history but it has also left the digital music market without the fiercely energized catalyst that kicked it into motion. By the time Apple launched the iPhone in 2007, the installed base of iPods was already slowing. Though sales were still increasing, the majority of those were either replacement or additional purchases. So although iPod sales were booming still, the number of new iTunes Music Store customers was not. Throughout 2008 I presented the data to a number of senior record label executives at the time and I argued that they needed to start planning for a post-iPod slow down. Some of them didn’t take me too seriously, and who could blame them, after all iPod sales were growing strongly and iTunes downloads were growing at a stellar rate. But now, with a few years of market data behind us, the true scale of the post-iPod slowdown is clear (see figure). As soon as iPod sales slowed, so did the digital music market. Prior to 2008 the digital music market had grown by an average annual rate of 85.2%, after 2008 that rate dropped to 7.5%. In many markets the 2009 slowdown was of falling-off-a-cliff proportions: in the US digital growth slipped from 30% in 2008 to a near flat-lining 1% in 2009.

Streaming services have started to bring some welcome momentum to digital music. But much more is needed from them if growth is to be reinvigorated. That growth may also be helped by new music formats like the forthcoming Lady Gaga album app. Whatever the source of it, it is clear that the music needs another iPod momentum to kick the digital market back into life.

Mobile apps can stake a pretty solid claim to being the single most important shift in consumer product behaviour in the last 5 years. Sure the devices themselves are pivotally important, but were it not for the apps consumers install on them, they would just be better versions of the feature phones and early smartphones from half a decade earlier. Apps have transformed consumers’ expectations of what digital experiences should be, and not just on connected devices. But Apps have also transformed product strategy, in two key ways:

Apps have replaced product strategy with feature strategy

Apps have created a renaissance in the consumer software market

Apps have replaced product strategy with feature strategy

Though there are a good number of apps which can be genuinely held up as fully fledged products (Google Maps, Angry Birds, WhatsApp etc.) many are in fact product features rather than products. Shazam for example is a fantastic feature, so fantastic that it should be as ubiquitous in music products as a volume button, but it is nonetheless a feature not a product. Don’t mistake this for a derogatory critique: indeed feature strategy is virtually the core DNA of the app model. After all apps rely upon the core product of the smartphone or tablet itself to do much of the hard work.

Apps co-exist with the core functionality of the device in order to layer extra features on top. Instagram uses a phone’s camera and web functionality, Layar uses the camera and GPS and so forth. In short, apps add features and functionality to hardware products. That does not make them inherently any less valuable for doing so, but it does make them dramatically different from pre-App products. Even the majority of utility apps, such as those that track rail and flight schedules, or the weather are at heart browser bookmarks on steroids. Games are perhaps the only app category which in the main can be considered as self-contained products.

This shift from product strategy to feature strategy has slashed the time it takes for products to get to market and has dramatically reduced development overhead, but it is a model riven with risk. Consumers and the device ecosystem companies are winners, but many app developers are exposed. On the one hand they have the insecurity associated with platform dependency, on the other they know that if their features are that good that they will likely be integrated into the device’s core OS or into the featureset of another app with broader functionality. Sometimes those scenarios will be achieved via favourable commercial avenues (such as an acquisition or licensing) but sometimes it will just be flat out plagiarism.

The lesson for app developers is clear: if your app is a feature and it is good, then you need to plan for how to turn it into a product, else plan for what to do when your app has become someone else’s feature.

Apps have created a renaissance in the consumer software market

It is sometimes easy to lose sight of just what apps are: software. In the PC age software was for most people one of three things:

Microsoft Windows and Office

An anti-virus tool

A bunch of free-trial bloatware shortcuts preinstalled on their desk top pre point of sale

Mainstream PC behaviour was defined by Microsoft functionality and browser based activity. Sure, software from the likes of Real Networks and Adobe supported much of those browser based experiences, but they were to the consumer effectively extensions of the core OS rather than software products themselves. A premium consumer software market did exist but never broke through to mainstream. Consumers didn’t know where to look for software, whether it would install properly, whether it would work on their PC, and then on top of all this they were faced with having to provide credit card details to small companies they knew nothing about.

Mobile apps changed all of that. App stores simultaneously fixed the discovery, billing, installation and compatibility issues in one fair swoop. Apps have enabled the consumer software market to finally reach its true opportunity. Just in the same way that the iPod allowed digital music to fulfil its potential.

Apps continue to transform consumer behaviour and expectations

So where will feature strategy and the reinvigorated consumer software business take us? What is clear is that consumers are getting exposed to a wider array of digital experiences and are evolving more sophisticated digital behaviours due to apps. Apps are also enabling consumers to do things more effectively and efficiently, and are empowering them with more information to make better decisions, whether that be getting the best flight price or choosing the best local plumber. They are also making consumers expect a lot more from a device’s ecosystem than just the devices. How often do you see a phone company advertise its handsets with the screen turned off? It is the apps that count. For now, however good Nokia might be able to make its smartphones it knows that its app catalogue and ecosystem struggles to hold a candle to Apple’s App store and ecosystem (the same of course applies to all other handset manufacturers).

Apps have become velvet handcuffs for connected device owners

But what happens if/when consumers start to shift at scale between ecosystems? For example, say Apple finds swathes of its iPhone and iPad customers switching to competitors in the future, what sort of backlash will occur when consumers find they have to expensively reassemble their app collections to reconstruct the features they grew used to on their Apple devices? Perhaps a smart handset manufacturer would consider investing in an app amnesty, giving new customers the equivalents of their iOS apps for free on their new handsets.

For now though, Apple’s market leading app catalogue behaves like velvet handcuffs on its customers and gives it a product strategy grace period, in which it could get away with having a sub-par product generation, with customers staying loyal because of not wanting to lose their App collections. But not even the strength of Apple’s app catalogue would not enable them to keep hold of disaffected customers much longer than that. After all, apps are features, not the product itself.

Digital revenues surpassed 50% of total recorded music sales in the US last year, but almost reached that point in 2010, level pegging physical sales on 49% at year end (performing rights made up the rest according the IFPI). By comparison full year digital revenues in the UK in 2011 made up 35.4% of total trade revenues according to the BPI’s (invaluable) 2012 Yearbook.

The BPI’s announcement today refers to 1st quarter data alone. In Q1 2012 digital accounted for 55% of income at £86.5 million, up from £70 million in Q1 2011 when it accounted for 46.1% of income. The eagle eyed of you will have noticed that even in 2011 digital’s Q1 share was markedly above the annual total of 35.4%. Underlying this disparity is the emergence of a new wave of seasonal purchase behaviour, what I call the Post-Holiday Surge.

Christmas / holiday period sales have always been by far the most important for record labels (highlighting why it is so important that someone somewhere gets digital gifting fixed – and iTunes vouchers are not the answer). The advent of digital has created a second wave of festive spending: after the Christmas / holiday period we now see a surge in digital sales as people fill up their brand new MP3 players, tablets and smartphones with new music. Although because Apple accounts for c.75% of digital download sales it is probably more accurate to restate that as ‘we now see a surge in digital sales as Apple customers fill up their brand new iPods, iPads and iPhones with new music from the iTunes Music Store’. (Other digital channels such as Spotify of course play a major role in digital revenue, but less so in the post-holiday boom).

This is why Q1 increasingly over reports for digital sales. That is not to take anything away from the numbers reported by the BPI (it is a key milestone worthy of celebration) but it shouldn’t distract us from the fact that the UK remains somewhere between 1.5 and 2 years behind the US in terms of the shift to digital. If trends continue at their current rate the end of year digital revenue share in the UK should hit somewhere in the region of 46% to 48% i.e. pretty much where the US was in 2010.

Digital sales are growing, but still not quickly enough across the entire year. Full year 2011 UK trade data shows that physical income declined by £84.2 million while digital grew by £55.8 million (a net loss of £28.4 million). In Q1 2012 a very different picture appears: year-on-year digital increased by £16.5 million while physical declined by £12.3 million, a net gain of £4.2 million.

The Post-Holiday Surge phenomenon illustrates where digital needs to be performing at now and for the whole year, namely growing more quickly than CD sales contract across 12 months of sales. In the UK, Q1 is digital’s quarter, now it needs to take ownership of the entire year just like it did in the US.

Yesterday I delivered a keynote at the Music 4.5 Mobile music conference. My presentation was entitled ‘Mobile Music: Apps, Ecosystems and the Cloud’ and here are some of the highlights.

I’ve been a music industry analyst for more years than I care to remember and I recall my first mobile music experience being on a Wap 1.0 handset with a monochrome screen and no graphics. Mobile music has obviously come on a long way since then but it remains hindered by the recurring error of trying to do too much too soon. Mobile seems to be perennially burdened with developers’ aspirations being one step ahead of what contemporary mobile technology can deliver. Witness the continually delayed arrival of ‘NFC payments are about to go mainstream’ as a case in point. Mobile music’s poster child Shazam, was itself far too early to market. I remember being demoed the tech by the founder a decade ago. It took the advent, many years later, of the iPhone and the iTunes App Store to enable Shazam to become the runaway success it currently is. Most start ups aren’t lucky enough to manage to wait for the pieces to fall in place.

Mobile music is undoubtedly going through an unprecedented period of buoyancy, perhaps even prosperity, driven by two key dynamics: the rise of smartphones and the app boom. 46% of UK consumers have a smartphone (see figure 1) which at first glance presents a great addressable audience. But as my former colleague Ian Fogg observed, as smartphones go mainstream we end up with the quasi-paradoxical situation of smartphones with dumb users. (By way of illustration one panellist referred to a customer request supporting for his HTC iPhone). Most new smartphone users don’t even use a fraction of the functionality on their devices and this creates big problems for music strategy. Because mobile music apps are inherently the domain of the tech savvy, not the tech-daunted majority.

It is easy to think that the future of mobile is apps. But as a cautionary tale consider that UK ring tone revenues plummeted by 32% in 2011. Once ring tones looked like the future of mobile music. Things change, and quickly so.

Apps are just one step in the evolution of mobile

Mobile Music has had more than its fair share of false dawns, largely because of wrongly set expectations. The App revolution appears to have finally kicked mobile music into market maturity, though in actual fact it is just one more step on the journey.

One of the key reasons apps have been such a runaway success (Apple just announced its 25th billion App download) is because they play to the unique characteristics and strengths of mobile as a channel. They deliver fun and convenient experiences that are typically also social, location sensitive and instantaneous. All integral parts of the mobile phone’s DNA.

All of which is great of course, but there is a risk that the current infatuation with Apps is a focus on form over function. Apps may have driven a paradigm shift in mobile behaviour but they are in the end just software. They are a natural part of the evolution of the mobile platform and experience. They play just the same role as software does for the PC. But of course we don’t excited about having McAfee and Excel icons on our desktop (see figure 2). The reason why it feels so different for Apps is because of the channel strategy, namely App stores. There’s just one place to go and get every type of software you could want, all of course with the same billing details and some guarantee of quality of experience. A far cry from the PC experience of searching the web for the right software, reading reviews and creating a new user profile on yet another online store, hoping that the retailer is safe and secure.

The history of mobile music to date can be broken down into three key stages (see figure 3):

Stores

Apps

Access

A lot of consumer got burned in that first stage of mobile music stores, finding themselves subjected to poor quality experiences that paled in comparison even to the supremely average contemporary online stores. The main mistake made was to expect too much from the rudimentary technology that was available: handset memory and screens were both too small and connectivity was far too slow and patchy. WAP 1.0 and GPRS simply weren’t music delivery technologies. The first stage of mobile music development failed because mobile tried to be a ‘mini-me’ PC music and was doomed to never stand up to the test.

The wave of the current App boom has lots of force left in it yet. But when it finally does subside, the marketplace is going to be left realizing that Apps are the tool not the endgame. The next stage of mobile music will be putting into practice what the app revolution has taught us about what mobile should be, what role it should play and where it should sit.

Value chain conflicts

Perhaps one of the most challenging aspects of launching a mobile music service is the conflict across the value chain. In highly simplistic terms there are three key constituencies in the consumer mobile value chain: the handset makers, the carriers and the retailers. Of course sometimes one entity can play two or even all three roles. Each wants to own as much of the customer relationship as they possibly can. Throw music in the mix and suddenly each of those stakeholders is busy trying to leap frog the other (see figure 4). This of course is what Nokia found themselves up against when trying to take Comes With Music to market: the carriers simply saw Nokia trying to circumvent their own heavily funded digital music services and yet Nokia was still asking them to subsidize those very same handsets…

The mobile music service value chain has become a complex place to navigate, with not only competition but also a diversity of business models each with their own unique twist on carving up the revenue pie (see figure five).

Value Chain Conflict Translates into Consumer Confusion

But value chain conflict doesn’t just impact business, it hits consumers as well, with an increasingly confusing mish mash of music brands on any given phone. And then of course there is the added complexity of ecosystems and operating systems. Consumers are inadvertently being forced into make bets on their long term mobile future. Once a consumer has opted into an app store ecosystem, paid to download apps over a 2 year contract, uploaded their music to a locker, saved their playlists etc it becomes very hard to move. Not so much velvet handcuffs as clapped in iron chains. Add to that the complexity of handset operators developing their own app and music service ecosystems within each of the OS siloes (see figure 6) and an increasingly complex picture emerges. All of which skews the field to music services which are not tied to any single operating system fiefdom. Perhaps the biggest winner out of all of this mobile music fragmentation will be Facebook? Currently quietly collecting the world’s most comprehensive set of music service user data, come the end of the year Facebook will be uniquely well positioned to act as cross-service, cross-OS conduit. Spotify might be making a play for being the operating system for music (I say the API for music, though that’s probably semantics) but Facebook could become operating system for music *services*.

The Future’s Bright, Probably

There is no doubt that mobile brings a huge amount to the digital music equation, making music discovery, acquisition and consumption more immediate and fun than it has ever been. With the help of the likes of TopSpin and Mobile Roadie it has become the ideal conduit for deepening direct to fan relationships. And though mobile will play a key part in cloud focused music services it is the app developer community which has transformed mobile most. While paid mobile music services remain mired in internecine value chain conflict, Apps have transformed mobile as a music channel from an awkward, underperforming curiosity into something vibrant and truly differentiated.

Tablets add important context. They turn the conversation from mobile music strategy to connected device music strategy. (They also do a better job at most music experiences than phones). In fact talking about mobile as a separate channel is no longer that instructive, rather we should think about mobile as one consumer touch point in an integrated channel and platform strategy.

But, once again, it is crucial to consider that Apps are the enabler, not the objective. Remember, ringtones were the future once too. The challenge for developers is to navigate through the wild west gold rush, and establish long term learnings from the App boom experience. Think of the App economy as one big market research project (that’s certainly how Apple views it). When the wave subsides the mobile music landscape will have changed forever. Artists, labels, managers, developers, carriers, handset makers all need to work together to ensure that that future is as positive a force for the music industry as the early signs suggest it could be. The depressing alternative is that we look back in 5 years at the App era as another ringtone bubble.

Today Apple formally launched iCloud. Back in June when Apple first announced iCloud I said I considered it a great start but just that. After today’s announcement I’ll add that there is more meat on the bones but that Apple has still fallen short of its potential here. Don’t get me wrong, iCloud and iTunes Match are great, elegantly implemented services. But I still think Apple could have done more, much more.

Scale. Apple is a truly global company with global reach. Any service it launches needs to share as much of that reach as possible to deliver the benefit to device sales it exists for. So it was a disappointment that Apple didn’t announce an international rollout for iCloud at launch (international markets will come later). Launching in the UK will be crucial for Apple and will be where they can steal a march over the rest of the Tripple A.It is the most advanced digital market in Europe and Apple’s biggest market too. Android and Amazon won’t find it so easy brining their locker services to the UK as Apple will though. The UK does not yet have fair use legislation so the other 2 A’s (unlicensed) locker services that depend upon DMCA provisioned fair-use would not be legal in the UK.

Product. Most of the attention is around the iPhone 4S and new iPods. They are of course what Apple is all about. The seamless integration of iCloud significantly enhances the value proposition of these products. We are in an age where consumer devices are defined by their surrounding ecosystem as much as by the hardware itself (see my Socially Integrated Web post for more on this). iCloud takes the Apple ecosystem to the next level. I’d still like to have seen better productizing of it though, such as pre-installed device bundles with a year of iCloud included as a standard pricing option alongside harddrive capacity.

Ambition. Here is where Apple fell a little short from a music perspective. I’ve sensed a steady weakening of Apple’s music strategy ambition over the last few years and today’s announcements fit the trend. It makes absolute sense of course. When Apple first launched the iPod, music was the killer app for the small memory monochrome screen device. In the days of the iPad, music just doesn’t show off the capabilities of the device like video, books and games do (regardless of whether that is the main activity people conduct on iPads or not). iTunes has been hugely successful (16 billion downloads to date and 70%+ market share). But Apple’s music strategy and consumer offering hasn’t changed dramatically since launching in 2003. There have been some great evolutions (more catalogue – 20 million tracks, DRM-free, better editorial and programming etc) and some half hearted innovations (Ping, Genius) but it remains fundamentally the same product it was 8 years ago. Compare that to the evolution of the iPod.

Cash. Apples’ great advantage in digital music is that it can afford to loss lead if it so wishes as music is all about selling i-devices not direct revenue for them. Yet Apple is ideologically a margin company and this is why they don’t ‘do a Kindle Fire’ and build a killer music subscription offering because they calculate they can get better ROI from more modest music innovation.

Ecosystem. Apple have just put clear blue water between their music ecosystem and those of the other 2 A’s of Digital Music. The elephant in the room though is the new ecosystem in town: Facebook. Apple was glaringly absent from the F8 announcements and there is no space for Facebook here. Apple’s ecosystem is defined by devices, Facebook’s by user data and user convenuience. Apple and Facebook will start banging into each other (see figure) and sooner or later the pair will start needing to build co-existence strategies. In the meantime expect Android Music to start building strong links with Facebook.

So in conclusion, I walked away from the Apple event with the familiar feeling that I wish there had been more. But like I say, it is a familiar feeling. I suspect that the music industry has missed its window of opportunity with Apple to drive truly transformational music industry innovation. Maybe now they’ll start to regret having played hard ball with Apple in days gone by and start looking for someone else to pick up the baton. They may be looking for some time.

As I stated in a previous post, Amazon and Apple are 2 of Digital Music’s Triple A (Android making up the third). Both have in their respective ways shaped online music more than any other company (Apple with iTunes, Amazon with online CD sales). Both willplay a major role in digital music’s, at the very least, mid-term future. But they are in digital music, and digital content more broadly, for mirror opposite reasons (see figure).

Put simply, Apple is in the business of selling content to help sell devices whereas Amazon is in the business of selling devices to help sell content. There is a poetic symmetry the identical yet polar opposite strategies of the two companies.

The differences have direct implications that are also mirror opposites:

Apple can happily ‘just about break even’ on music downloads because of the way it helps sales of their high margin i-devices

Amazon can happily price the Kindle Fire so aggressively that it is priced more like an MP3 player (and expect to lose money for the near term at least) because of the volume of sales of content it expects / hopes it will drive

Perhaps most importantly music, video, games, books and all other forms of content are crucial to the success of both. 20th century media business models may be tumbling around our ears but the fact that the future of the tablet market depends so heavily upon media products will be among the foundations for future growth.

So Apple finally launched their much anticipated cloud music service, and they didn’t disappoint. At least by cloud-locker standards they didn’t. But I wanted more, a lot more.

Here’s my quick take on what Apple launched and where I think they should go next:

Automatic Downloads

What is it? Enables iTunes buyers to transfer music purchases to any iTunes supported device of songs that you have bought from iTunes.

How much of a big deal is it? This is a welcome move, but one that really should have happened long ago, and it’s entirely not Apple’s fault it took so long. The music industry still thinks of digital music on a per-device basis. But restricting the devices people can take their purchased music on only weakens legal services when compared to illegal ones, which of course have no such qualms. Thinking of music consumption on a device basis rather than a person basis is simply the wrong worldview and it needs to change, fast. Automatic Downloads are nice move towards a new way of thinking, but of course within the tightly controlled confines of the iTunes ecosystem.

iTunes Match

What is it? Matches your music collection against Apple’s cloud catalogue and upgrades your music to 256 kbps AAC, all for $24.99 a year.

How much of a big deal is it? This is the sort of locker service Amazon and Google *should* have launched. Instead of having to painfully upload your entire music collection you simply need to scan and match, a process which should take a matter of minutes. It makes a cloud collection a seamless extension of your local collection.

Mulligan’s Take: With these simple but elegantly executed features Apple has created a best-of-breed cloud / music store combination that makes much of the competition pale by comparison. Apple has done what Apple does best: it has let the competition move first, learned from their mistakes and launched a better product. And yet it is it enough? Apple have done more than enough in terms of the current cloud-storage debate, and this is a clear shot across the bows of Google and Amazon’s burgeoning digital music ambitions. Also, make no mistake, Apple will have worked hard to get what they have from the rights holders to get this service to market. But it doesn’t do half as much as it could do, to move the digital music conversation on beyond the ‘distraction’ of locker services.

Locker services – in iTunes Match form – should be part of every digital music service, just like there should be a play button on every MP3 player. But they are just that: a feature not a service. If the music industry is going to take big strides forward over the coming years it needs more than locker services, much more. It needs rich, interactive and social music services that make people fall in love with the power of digital music again. In the context of iCloud that would mean:

• On-demand streaming of music you *don’t* own
• Monthly iTunes purchase credits which (unless you specify otherwise) automatically convert into purchased downloads of the songs you played most last month but didn’t own
• Subscription costs bundled into the cost of Apple devices at point of purchase
• Ping!, Genius, Twitter and Facebook deeply integrated to create a truly social music consumption and discovery experience
• Limited Garageband and iMovie functionality integrated to enable mash-ups

That is of course a lengthy wish-list and one that won’t be fulfilled anytime soon. But nonetheless that is the sort of thing the record labels need to encourage Apple, Google and Amazon to build over the next few years if they are going to get digital music out of its current impasse.